Facebook expands reach with $19 bn deal for WhatsApp (Update)

February 19, 2014
by Sophie Estienne

The logo of mobile app "WhatsApp" is displayed on a tablet on January 2, 2014 in Paris

Facebook said Wednesday it was buying the fast-growing mobile messaging service WhatsApp in a deal worth an eye-popping $19 billion, expanding the global footprint of the social networking giant.

The mega-deal bolsters the world's biggest social network—which has more than 1.2 billion members—with the 450-million-strong WhatsApp, which will be operated independently with its own board.

It is Facebook's biggest acquisition and comes less than two years after Mark Zuckerberg's firm raised $16 billion in the richest tech sector public stock offering.

The purchase includes $12 billion in Facebook shares and $4 billion cash. It calls for an additional $3 billion in restricted stock units to be granted to WhatsApp founders and employees that will vest over four years.

"The acquisition supports Facebook and WhatsApp's shared mission to bring more connectivity and utility to the world by delivering core Internet services efficiently and affordably," said a Facebook statement.

Facebook reportedly sought to acquire another hot messaging firm, Snapchat, for $3 billion last year. In 2012 Facebook closed its deal for Instagram, worth some $1 billion at the time based on stock value.

"WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable," said Zuckerberg, Facebook's founder and chief executive.

"I've known (WhatsApp founder) Jan (Koum) for a long time and I'm excited to partner with him and his team to make the world more open and connected."

WhatsApp is a cross-platform mobile app which allows users to exchange messages without having to pay telecom charges.

Koum, who joins Facebook's board under the deal, said "WhatsApp's extremely high user engagement and rapid growth are driven by the simple, powerful and instantaneous messaging capabilities we provide. We're excited and honored to partner with Mark and Facebook as we continue to bring our product to more people around the world."

In a blog post, Koum said, "Almost five years ago we started WhatsApp with a simple mission: building a cool product used globally by everybody. Nothing else mattered to us."

The tie-up gives WhatsApp "the flexibility to grow and expand, while giving me, (co-founder) Brian (Acton), and the rest of our team more time to focus on building a communications service that's as fast, affordable and personal as possible," Koum added.

The acquisition represented likely the biggest-ever price for a tech startup, trumping the $8.5 billion paid for Skype—which allows users to make voice and video calls over the Internet—by Microsoft in 2011.

"The size of this deal is really massive and it will get people talking about a bubble," Greg Sterling at Opus Research told AFP.

Sterling said the deal is a risk for Facebook because "in social media you have a flavor of the month, and next year we might have another app with extremely rapid growth."

"I think (the high price tag) comes from the frustration of not being able to buy Snapchat, and then there is the youth factor," Sterling added.

"Facebook really needs to have vehicles to attract younger users, and Instagram is not going to do that by itself."

With this strategy, Sterling said Facebook "is becoming a kind of holding company for different social media properties that appeal to different groups."

Sterling said Facebook may have some ability to "monetize" WhatsApp by delivering ads over the messaging service.

Roger Kay at Endpoint Technologies said WhatsApp has become one of the most popular mobile applications worldwide "because it allows you to message anybody anywhere for free."

Kay said the deal makes sense on one level because of Facebook's record stock run-up.

"When you have a stock like that which has run up quickly and created a lot of paper value, it's good to trade that for other value," he told AFP.

"It's not obvious how they can get $12 billion out of this but it's been clear for a while that WhatsApp is very interesting. It reminds me a little bit of Skype."

WhatsApp: a booming smartphone message service

WhatsApp was launched five years ago as a shot at doing to text messaging what Skype did to telephone calls.

If Facebook's move to buy the startup in a cash-and-stock deal valued as high as $19 billion is any indication, the California-based WhatsApp may have hit the mark.

The firm founded by former Yahoo employees Brian Acton and Jan Koum in 2009 took its name from a play on the phrase "What's Up," according to its website.

They also devoted themselves to a credo of "No Ads. No Games. No Gimmicks."

A note stating just that and signed by Acton remains taped to Koum's desk, according to venture capital firm Sequoia, which invested in the startup early and stands to cash in big time on the Facebook take-over.

The "contrarian approach" of gathering no information about users for targeting ads was shaped by Ukraine-born Koum's aversion to tactics of secret police in communist countries, Sequoia partner Jim Goetz said in an online note.

"Jan's childhood made him appreciate communication that was not bugged or taped," Goetz said.

"When he arrived in the US as a 16-year-old immigrant living on food stamps, he had the extra incentive of wanting to stay in touch with his family in Russia and the Ukraine."

Koum remained true to those ideas when, after working at Yahoo with his "mentor" Acton, he turned to building WhatsApp, according to Goetz.

The stated mission was to build a better alternative to traditional SMS messaging in a world where smartphones were clearly becoming ubiquitous.

The founders jokingly described themselves at the website as "two guys who spent combined 20 years doing geeky stuff at Yahoo! Inc."

WhatsApp is a platform for sending images, video, audio, or text messages for free over the Internet using data connections of smartphones.

The application is free, but after using it for a year, there is an annual subscription fee of 99 cents.

"We feel that this model will allow us to become the communications service of the 21st century, and provide you the best way to stay in touch with your friends and family with no ads getting in the way," the startup said in a blog post discussing pricing.

WhatsApp is reported to have grown stunningly fast to more than 450 million users and said to handle 50 billion messages daily.

As of the start of this year, WhatsApp had 50 employees, more than 30 of them engineers. While the company has its headquarters in the California city of Mountain View, where Google has its main campus, most of the engineering work is reportedly done in Russia.

Its chief executive claims it has more users than Twitter. It's rumored to have just rebuffed a $1 billion buyout offer from Google. So what's up with WhatsApp? And how has a San Francisco startup that many Americans still ...

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